Changing Tax Exclusion For Employment-Based Health Insurance

As lawmakers consider ways to pay for health reform, use our glossary of potential offsets to get caught up fast.

By Beth Sussman

Updated: January 1, 2011 | 2:18 p.m.
July 23, 2009

Glossary Of Offsets Efficiencies • Public Option • Health IT • Comparative Effectiveness • Medical Homes • Medicare Cost Sharing Taxes • Taxes For Noncompliance • Surtax On The Wealthy • International Tax Changes • Sugary Beverage And Alcohol Tax • Tax On Insurance Companies • Plastic Surgery Tax • Changing Tax Exclusion For Employment-Based Health Insurance Quality Of Care • Measuring Quality Of Care • Preventive Service • Expanding Disease-Management Services Provider Payment Revisions • Pay For Performance • Abolishing The SGR • Bundling • Reduce The Annual Update Factor • Partial Capitation • Penalties For High Readmission • Cut Payments To Medicare Advantage TOPIC PAGE: Health Care

Updated at 3:30 p.m. on Nov. 24 to reflect continuing legislation.

Definition

One potential change would cap the tax exclusion of employment-based health insurance benefits at a certain value. In another plan, the value of benefits would no longer be excluded from income for tax purposes; instead, workers would receive a tax deduction that would phase out for higher-income taxpayers.

Executive Summary

Any change to the tax exclusion for employment-based health insurance is likely to mean that at least some of those receiving health insurance through an employer plan would see their taxes rise. Most legislators have ruled out this option because they fear it could hurt middle-class employees.

As a result, the Senate Finance Committee considered a revised plan that would only tax the richest benefit packages, but that plan was criticized because it would apply to firefighters and police officers, who often receive health insurance plans that outweigh their salaries.

"We will not be taxing... health care benefits in any legislation that comes from the House," Speaker Nancy Pelosi, D-Calif., said while the plan was under consideration by senators in early July.

Senate Majority Leader Harry Reid, D-Nev., and Health, Education, Labor and Pensions Committee stand-in chairman Christopher Dodd, D-Conn., also expressed a hesitancy to support any plan to tax health care benefits.

The White House also expressed opposition to altering the tax exclusion because it would likely raise taxes on households making less than $250,000, which President Obama promised not to do during the campaign.

Employment-based health benefits are considered part of income, but they're currently held aside for taxation purposes, no matter how high their value or how well-paid the employee.

Despite opposition to restructuring the tax exclusion, the Finance Committee supported it because it could raise a large part of the money needed for health care reform while discouraging Americans from purchasing expensive "Cadillac" plans that bog down the system. Replacing the tax exclusion with a tax deduction would see similar benefits.

"Most economists would suggest that eliminating the tax preference could actually contribute to a reduction in overall health care spending," explained Kenneth Thorpe, chairman of the health policy and management department at Emory University.

John Sheils, senior vice president at the Lewin Group, a health policy consulting firm, argues that a standardized tax deduction is preferable to the current exclusion because it taxes everyone with health care insurance at the same level. "You don't get a higher deduction because you spend more on health care, so you can go to a more conservative health plan without giving up the tax benefit," Sheils said.

Max Savings

The original restructured tax exclusion plan considered by the Senate Finance Committee would have raised $320 billion over 10 years; the details of that restructuring were not made public. The revised Finance Committee plan would cap the tax exclusion at health care benefits equaling $25,000, raising $90 billion over 10 years.

A tax exclusion replacement plan detailed in a December report by the Congressional Budget Office would raise $606 billion in revenue through 2018 by eliminating the tax exclusion and implementing a refundable tax credit equal to 25 percent of the insurance premium that would phase out beginning at $80,000 of income for unmarried filers and $160,000 for couples.

Plans

Though the tax exclusion cap was considered in the Senate Finance Committee bill, it did not make it into the final Senate or House bill.

Links

• 2008 CBO Budget Options for Health Care (tax exclusion is option 9).

• "Tax on health benefits fading?" AP, July 7

• "House Reform Bill Talks Slow; Senators Look To Regroup," CongressDaily, July 10 (subscription)

• "Baucus Says Obama 'Not Helping' on Health-Care Tax," Bloomberg News, July 16

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